/ 28 October 2016

Mid-term budget: ​Gordhan chilled by ill wind

In the Mail & Guardian this week
In the Mail & Guardian this week

Finance Minister Pravin Gordhan coughed and sniffed as he reiterated the key messages of the mid-term budget at a press briefing.

Flanking him, the director general of the treasury, Lungisa Fuzile, and Deputy Finance Minister Mcebisi Jonas were wearing dark-blue ties set starkly against ghost-white shirts. In the icy room, Gordhan repeatedly sipped from a teacup and he apologised; he was battling a cold.

As he spoke, hopeful as he tried to sound, it was evident he was battling much more — a sickly economy and disease-ridden politics.

“The economic environment is a challenging one but not an impossible one,” he assured his audience. “We are not in a hopeless situation.”

Based on assumptions that global growth will lift slightly next year, that most commodity prices will strengthen and food inflation will fall, the medium-term budget policy statement predicts that the economic cycle will have reached its lowest point and the country will have successfully avoided a recession.

According to the assumptions, recovery is ahead and economic growth could reach 2% in 2018.

Even so, tax revenues have dropped and more money must be found to fund the shortfall. In a bid to keep debt under control, government spending will be slashed by R26-billion over the next two years, and tax income will rise by R43-billion.

Gordhan would not be drawn on what tax decisions the government would consider.

Tertius Troost, a tax consultant with Mazars South Africa, said several ways to raise additional tax had already been put forward, such as the sugar tax.

“But it is not clear whether these measures will be sufficient to raise this amount,” he said. “One can speculate that the treasury will explore options such as additional measures to tax the super-wealthy and possibly an increase in the VAT rate.”

Reforms in mining, energy and telecommunications are expected to boost investor confidence and possibly avert a credit rating downgrade.

There has also been progress in amending labour legislation and on a national minimum wage, a process led by Deputy President Cyril Ramaphosa.

“We hope to have it well before Christmas and gift-wrapped,” Gordhan enthused.

It is hoped reform of the state-owned enterprises, which includes a possible realignment of the government’s problematic airline shareholding, will boost confidence.

If the hard work pays off, and if the economic assumptions are correct, the current budget policy statement “will get us through the next two years”, Gordhan said.

Growth is optimistically expected to come in at 0.5% for the year. But “it could get to 1.7% next year, and it could get even better, provided we do what we need to do”.

But the minister neglected to say what the policy statement points out: that it could get worse. What is presented in the policy statement is one of the best out of four macro-economic scenarios modelled by the treasury. Two others, assuming a long-term economic decline or heightened global turbulence, see poor economic growth and a persistent budget deficit, with debt possibly stabilising only in 2021.

The final scenario sees South Africa benefiting from high exports as a result of a weaker rand.

If the economy grows at less than 2% for an extended period, the stability of the fiscal framework cannot be guaranteed.

In contrast to the manner in which a wide-eyed (and former finance minister) Nhlanhla Nene and a chortling Higher Education Minister Blade Nzimande handled the #FeesMustFall protests outside Parliament at last year’s medium-term budget policy statement, this week Gordhan met students outside the parliamentary gates and received a memorandum. He had earlier emphasised that the students had been heard. “We are a government that is listening,” he said.

But, like last year, the students were later met with stun grenades and the Cape Town city centre was filled with the sound of sirens.

The fastest growing budget item after debt service costs is post-school education and training. It has been growing faster than any of the other budgets over the past five years. This has benefited the vocational colleges, sector education and training authorities and the National Skills Fund rather than the universities. Investment in these remains important to the government and Nzimande explained on Wednesday that, ideally, the college sector should be up to four times larger than the university sector.

Still, the policy statement proposes another R9-billion for the National Student Financial Aid Scheme over the medium term, some of which will come from drawing down on the state contingency reserve. This is in addition to the R16-billion added to higher education funding in the February budget.

Gordhan said fully funded education required a collaborative approach. He said he had been presented with five or six well-thought-out proposals on how to meet some of the students’ demands and these would be up for discussion.

Although he did not wish to discuss specifics with the media, he said there was a need for a stable political environment for confidence in the economy to grow.

Gordhan has been under attack, the latest bout being seemingly trumped-up charges by the National Prosecuting Authority for his role in authorising an early retirement. The matter will be heard in court next week.

Pre-empting the media’s desire to question him about it, Gordhan said one could not be “like an ostrich with our heads in the sand about the political context”, but he had only time (and perhaps the energy) to deal with the matter at hand.

“Next week we can talk about next week,” he implored his audience.

Nene was replaced in December last year by parliamentary backbencher Des van Rooyen.

That only lasted a weekend before Gordhan was brought in to restore confidence and bring the market out of free fall.

It would have been difficult to remove Gordhan in the same way. Investigations against the minister ensued and have so far resulted in the current charges, which critics claim have no chance of standing up in court.